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Dear John,
How are you?
I hope you are doing well,
First of all let me present the idea of the question existed in kaplan text study in order to make my question clear to you and understandable to your respected person.The following questions and answers are existed in Kaplan text study,
Example 1:
PER plc sells three products. The budgeted fixed cost for the period is $648,000. The budgeted contribution to sales ration and sales mix are as follows.Product C/S ratio Mix
P 27% 30%
E 56% 20%
R 38% 50%
Required: What is the break-even sales revenue?SOLUTION AS PER KAPLAN
Break-even point in $=Fixed cost / Contribution to sales ratio of the mix.
C/S ratio of the mix=(0.3*27%)+(0.2*56%)+(0.5*38%)= 38.3
Therefore, BEP in $=$648,000/38.3%
=$1691906Example 2:
BJS Ltd products and sells the following three products,
Products X Y Z
Selling price per unit $16 $20 $10
Variable cost per unit $5 $15 $7
Contribution per unit $11 $5 $3
budget sales in units 50,000 Unit 10,000 Units 100,000 Units
Assume the budgeted fixed cost $450,000.Required:Calculate the weighted average C/S ratio for the products.
I do usually calculate the weighted average C/S ratio as per the following,Weighted average contribution to sales ratio for the mix=($11*50,000 units +$5*10,000 units +$3*100,000 units) / ($16*50,000+$20*10,000 units +$10*100,000 units)= 45%
but if I have calculated the weighted average contribution to sales ratio of the mix as per the example 1 mentioned above I mean iam going to get the mix of the products and multiply by the contribution to sales ratio of the single procut to get the contribution to sales ratio of the mix.Step one:
Contribution to sales ration for each product individually
X = ($11/$16)= 68.75%
Y = ($5/$20)=25%
Z = ($3/$10)= 30%Step Two:
Mix of the products
X = 50,000 Units /160,000 Units = 31.25%
Y =10,000 Units / 160,000 Units = 6.25%
Z = 100,000 Units / 160,000 Units = 62.5%Therefore as per the calculation for the contribution to sales ration of the mix used in example one by Kaplan Text study contribution to sales ratio to this example should be as follow
Contribution to sales ratio=(68.75%*31.25%+25%*6.25%+30%*62.5%)= 41.80% approx.Finally my question is as follow:
In example two I had calculated contribution to sales ratio of mix in two different ways the first one as per Kaplan text study method mentioned above in example one and the second one as per my understanding but I got two different VALUES of contribution to sales ration of mix as follow:
The first method:
contribution to sales ratio for the mix=($11*50,000 units +$5*10,000 units +$3*100,000 units) / ($16*50,000+$20*10,000 units +$10*100,000 units)= 45%
The second method:
Contribution to sales ratio=(68.75%*31.25%+25%*6.25%+30%*62.5%)= 41.80% approx.MY Question
Why have I gotten two different answers (Values) of contribution to sales ratio of the mix?Iam so sorry for such long question but I had to explain the two examples to make my question clear to you.
I hope my question became more clear to your respected person.
Thank you in advance.You can calculate the CS ratio for the mix in two different ways (although both give the same answer).
One way is what you call the ‘first method’ in your answer to question 2 where you arrived at 45%.
The other method is to take a weighted average of the individual CS ratios, but if you do it this way then you weight them by the sales revenues and not by the number of units.
The sales revenues for the budgeted mix are:
X 50,000 x $16 = $800,000
Y 10,000 x $20 = $200,000
Z 100,000 x $10 = $1,000,000
Total: $2,000,000So the weighted average is: (800/2,000 x 68.75%) + (200/2,000 x 25%) + (1,000/2,000 x 30%) = 45%.
Do watch my free lectures on CVP analysis where I do explain this. (The lectures are a complete. free course for Paper PM and cover everything needed to be able to pass the exam well. If you are watching them then you do not really need the Study Text, although the Exam Kit remains essential however you choose to study 🙂 )
Dear John,
Thank you so much for your kind response,
Actually I did watched all your videos and really it’s useful but unfortunately i failed in the exam i just got 45% out of 100 so i do try to study the text study beside your informative lecture.Thank you so much.
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